Stocks tumbled on Thursday as volume quickened. All five major indices opened near session highs and closed near session lows. The Dow Jones Industrial Average is the only major index that is still well above its 20 and 50-day moving averages. Nonetheless, the blue chip index slid 0.5% yesterday. The S&P 500 lost 0.8% and closed at support of its 20-day MA. High beta stocks took a beating as the S&P MidCap 400, small-cap Russell 2000 and Nasdaq plunged 1.7%, 1.5% and 1.2% respectively. The Russell, S&P MidCap 400, Nasdaq and NYSE all ended the day below their 20-day and 50-day moving averages.

Market internals were bearish on Thursday. Both total volume and declining volume was higher on both exchanges. Turnover climbed by 0.8% on the Nasdaq and 7.6% on the NYSE. Declining volume overpowered advancing volume by a factor of 3.7 to 1 on the NYSE and 5.5 to 1 on the Nasdaq. Based on yesterday's price and volume action, it was apparent that institutions were actively selling. We would consider yesterday a distribution day on both exchanges.

On May 1st, the ProShares UltraShort MSCI Emerging Markets ETF (EEV) undercut and tested support of its 50-day moving average before reversing to close above this key mark. Yesterday, on an uptick in volume, EEV attempted to breakout above resistance of the four day high of $26.71. If EEV can clear yesterday's high of $26.86 it could present a buying opportunity. We are adding EEV to the watchlist. Trade details are available to our subscribers in the watchlist segment of the newsletter.



Yesterday's broad based distribution does not bode well for the market. With four of the five major indices close to losing support of their respective 20 and 50 day moving averages, it appears that we may soon retest the April 23rd swing lows.

On May 1, heavy volume selling in the S&P 500 forced us to cut long exposure in our model portfolio from approximately 38% to 17% by the open on May 2. While we tried to give the current rally the benefit of the doubt on Wednesday, Thursday's weak action pushed our market timing model into a sell signal, forcing us to cut exposure from 17% to cash on the open today. We are also removing both stock setups from the watchlist (SWHC and NTES) for now....although each setup could be back on the watchlist sometime next week.

Although we run a very disciplined swing trading system, our timing model allows us to be flexible and roll with the market when necessary. Our goal with every rally is to always believe in the uptrend until the market gives us a clear sell signal. We held on as long as we could this week, but we had to respect the heavy selling and step out of the way. We never know just how far a market can correct when conditions turn sour, but we really do not need to predict anything. We simply step out of the way and let the market tell us when to come back in. This is the benefit of a rules-based trading system, as it allows us to eliminate most of the emotion out of the equation.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.